Early this month, billionaire Anil Agarwal-promoted Vedanta Group was forced to shut its one million tonnes per annum alumina refinery at Lanjigarh in Odisha’s Kalahandi district due to unavailability of bauxite, 15 years after state-owned Orissa Mining Corporation signed over its rights to mine bauxite in the Niyamgiri Hills to the group firm.

The group has invested Rs 30,000 crore in six years to set up the aluminium business under Vedanta Aluminium, believing it would be able to get approvals for captive bauxite mines by the time the facilities get commissioned. Eventually, it commissioned a 1 mtpa refiner, a 0.5 mtpa smelter and a 1,215 Mw captive power plant, but approval for bauxite mining did not come.

“In such a state of affairs, it would be difficult for the projects to come up,” said Mukesh Kumar, CEO of Vedanta Aluminium over phone from Orissa. The company is looking at laying off a substantial number of its 550 direct employees under Section 5 of the Industrial Dispute Act. The closure of the plant has affected 2,500 contractual employees.

HOW IT UNFOLDED

Date

Events

Apr-97

OMC signed over its rights to mine bauxite inthe Niyamgiri Hills to Vedanta Group.

In September 2004, the ministry of environment and Forest (MoEF) granted environment clearance for the refinery and in October 2004, Vedanta Aluminum started the construction of the refinery. It was completed in early 2008 and alumina production was started soon after.

The Supreme Court started hearing on the three petitions against bauxite mining at Niyamgiri and granted clearance with conditions on sustainable development. Then, the MoEF granted an in-principle environment clearance for the mining project. In August 2010, it reversed its decision and rejected the forest clearance for the Niyamgiri Mines to OMC under protest from non-government organisations.

This way, Vedanta Aluminium lost its source of captive bauxite. OMC has appealed in the Supreme Court against the MoFE’s rejection of forest approval and the next hearing is expected in January. The company struggled for over three months to ensure that sustainable supplies of bauxite from Gujarat and other states before the closure of the plant.

“We believe it is now extremely unlikely that the company will get access to the bauxite in Niyamgiri hills,” said Abhijeet Naik, analyst with global brokerage firm CLSA in a recent report. “Given this setback, Vedanta Aluminium is pursuing the government of Orissa for allocation of an alternate source of bauxite for its alumina refinery,” he said.

Even if a bauxite mine allocation happens soon, it will have to spend years trying to get various clearances for the new mine, which will be followed by a mine development period. “It seems there would not be any relief on the bauxite mining front over FY13-17,” the report said, which added that FY18 is the earliest that the company might benefit from the availability of captive bauxite.

According to industry observers, the days of free mine allocations to the corporate sector are over. Once the mining Bill is passed, metal companies will have to participate in a bidding process to get access to mineral resources. In that case, Vedanta Aluminium will have to participate in a bidding process for any future bauxite mine allotment, which could substantially eat into the economic benefits of having captive bauxite.

This has led to deterioration of Vedanta Aluminium’s financial position. According to analysts’ estimates, the company is expected to register Ebitda (earnings before interest, tax, depreciation and amortization) of Rs 200- 450 crore over 2012-13 given its high cost structure. This is extremely low in the context of the high level of capital expenditure (Rs 30,000 crore) incurred on the commissioned and un-commissioned facility and the total net debt of Rs 29,500 crore.